Christchurch Quake: Time for Public Money and a New Deal
February 25th, 2011I was at University when the quake struck, eating my lunch and reading a paper on “Native Rights”. I didn’t hang about and immediately dived under the table as I didn’t like the look of the walls and ceiling lights flailing about like paper decorations. When the first shake had finished I headed outside quickly and sat down whilst the two big after shocks rocked the surrounding buildings. The University seemed reasonably unscathed……nothing like the CBD which is 5 kms to the East.
The damage of the Feb 22nd 6.3 shake is way worse than the Sep 4th 7.1 quake. No doubt this is due to the depth and the proximity of the epicenter. But this post is not about the earthquake, it’s about the economic impact and the re-building to come.
The cost of this disaster is only guessable at the moment. Numbers from $10 to 16bln have been thrown out but it could be anything. There is no doubt that this is a complete rebuild of the city’s infrastructure and central business district. Added to that is the viability of the eastern suburbs. They were affected badly and there will be questions over ground issues when it comes to re-building.
I want to go back to 1936 and the First Labour government which introduced low interest loans as part of a system of public finance to rebuild the country’s post-war economy. Think of it as New Zealand’s New Deal. The Reserve Bank governor can direct this at any time. This is certainly one possibility.
What I would like to see is fresh new money being injected directly into the economy by the government. The Treasury can action this at any time. The New Zealand economy has been struggling for a few years now since the GFC hit and deleveraging started. Business is struggling and cash is constantly tight. This latest quake will have finished off many business hanging by a thread.
I am proposing the Treasury create $5bln of new interest free money and credit it to the Government Earthquake Department for use in the rebuilding of public infrastructure. This is real money (not debt) and it will flow through into the economy thus giving it a boost as well as providing liquidity to the economy.
The money supply will increase by $5bln but I don’t believe there will be any inflationary risk. We are currently in a period of deflation and deleveraging with falling house prices and economic stagnation. NZ needs all the help it can get and there has never been a greater need nor a better time for this proposal.
It’s time for a New Deal. Please pass this on if you can.
Tags: #eqnz, christchurch, earthquake, infrastructure, interest free money, new deal, new zealand, public money, rbnz, reserve bank of new zealand
February 25th, 2011 at 4:57 am
As an Aussie seeing these disasters happen in Queensland and now in NZ, wholeheartedly agree it’s time for governments to think outside their shell. Now is a good time for the governments to start collaborating and sharing their recovery efforts and also factor in innovation like this…
February 25th, 2011 at 5:19 am
[...] This post was mentioned on Twitter by Ben Kepes and Gareth Llewellyn, Raf Manji. Raf Manji said: Please RT: A New Deal for #Christchurch: Public Money to rebuild city. http://bit.ly/eGJr5U #eqnz #money #nz [...]
February 25th, 2011 at 5:28 am
Agree something needs to be done to stimulate the economy and provide assistance to the city. But how do you propose the treasury just magically creates $5bn? They can’t just print money, make it appear from nowhere.
February 25th, 2011 at 5:41 am
hey Raf,
I was mindfull that you and your family were no doubt in Christchurch during the Earthquake so I hope all your loved ones are safe and well. My thoughts are with you as Christchurch recovers from this tragedy.
As you no doubt am aware I’m more likely to favour the public issuance of “money” than the fraudulent privately run system that we have now, but I have some queries.
Would the government then offer some form of security to steralize the issue of this new credit and what guarantee would we have that the banks would not refuse to purchase the bonds with the new money, thus leaving a credit overhang leading to hyperinflation? In some ways similar to how the Union Bank of Australia sabotaged the Colonial Bank of issue, which was created by the governor George Grey to issue a paper currency. The Union Bank accepted the notes as deposits but didn’t pay them out, but instead insisting that they be redeemed for gold which severely contracted the money supply and put a strain on gold reserves of the colonial government. Similar to what De Gaulle did to the United States in -’68-’70 which led to the end of the Bretton Wood system.
In 1854 a Committee of the House of Representatives
reported that “The existence of any Government issuing its
own paper exclusively is injurious to free commercial
enterprise.”17 The New Zealand Parliament passed an Act18
in 1856 winding up the CBI.
http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003mar66_1matthews.pdf
February 25th, 2011 at 6:01 am
Ryan
It actually has a historical precedent
“To finance its comprehensive proposals, the Government adopted the somewhat unusual course of using Reserve Bank credit, thus recognizing that the most important factor in housing costs is the price of money—interest is the heaviest portion in the composition of rent. … This action showed … it was possible for the State to use the country’s credit in creating new assets for the country.”
State Housing in New Zealand, Ministry of Works
February 25th, 2011 at 6:02 am
Actually, they can “just print money”. It’s generally not advisable, as it does tend to lead to inflation (see Zimbabwe’s hyperinflation) but not always.
Interesting idea, but I doubt it will fly with the market-driven ideology that pervades Treasury and this government.
February 25th, 2011 at 6:37 am
Thanks all for the comments. Please pass along for further debate.
Kimono: Yes we need to start thinking differently. As James notes, there is historical precedent for this type of action.
Ryan: well money does actually appear from nothing whether it’s issued by the government or the private banking system. the main difference is that public money is interest and debt free whereas private bank money is issued in the form of interest bearing debt. slowly i hope people are starting to learn exactly how money comes into being.
Mark: unfortunately that is the first reaction of most people. “print money” and “zimbabwe” come forward together. it’s just so wrong. of course too much money can cause inflation but countries like zimbabwe are a very special case.
new zealand has expanded the money supply at an average of 15.5% since Dec 1990 for example….now that’s pretty hefty and just part of the general monetary expansion by the commercial banks over the last 20 years.
we are proposing a 2% increase….it’s not going to break the bank and will in fact save $300m at least in interest costs.
i think you are right that the treasury will take some convincing….but we will keep doing our best.
james: as usual your input in invaluable. family is all well thanks. shaken but pleased to be away for a bit.
February 25th, 2011 at 7:09 am
And also develop some unique Christchurch architecture so that the rebuild marks the moment and sets a milestone in the city’s history.
February 25th, 2011 at 8:57 am
David: absolutely it’s something we can focus on. Some incredible new buildings to go with our wonderful old ones (those that are left). Buildings that inspire and bring people to the city.
February 25th, 2011 at 8:23 pm
You mention that New Zealand is in a state of deflation. Can you please direct me to the sources that cite that New Zealand is in fact not facing inflation?
February 25th, 2011 at 9:33 pm
Overworkedmonkey: i’m not going to debate the cpi level (which is running high, as it has done for years now). food prices are the main component of this and is driven by overseas pricing. housing prices are falling and given that is where our net wealth increase has come from over the last 10 years (see savings working group report).
my focus is on the money supply. central bankers think they have done a great job on inflation for the last 20 years…when they have failed to watch the money supply, the expansion of credit and the soaring asset price inflation.
it’s been a complete failure of policy quite frankly. so if you want to be picky over headline inflation then be my guest
February 25th, 2011 at 11:48 pm
I’m not being picky over the headline. What I am wanting to understand if the deflation you are referring to is across the board or simply a fall in the house prices? Having read a number of websites, my understanding is that there has been an increase in inflation (stands at 4%) contributed by rise in food, fuel, ETS and GST. Now unless I have my monies parked in a term deposit which on average returns 5%, I will be in fact eroding my the worth of my savings.
Jeff Rubin leads an interesting view on the return to times when countries will have to become more self-sufficient - http://www.youtube.com/watch?v=QhsMr49AKM8
I would be keen to know what is on your view on someone attempting to grow their egg nest as opposed to gaining returns on property.
February 26th, 2011 at 2:21 am
Brilliant suggestion. A perfect opportunity to test the waters in terms of NZ standing for a more socially just future.
The world needs a New Deal - through tragedy perhaps we can light the way.
Glad to hear you and yours are safe. God speed to you and the community around you who has been affected.
February 26th, 2011 at 2:52 am
overworkedmonkey: yes agflation (food prices) has been rising for a few years now..many factors such as natural disasters but primarily the financial markets using commodities as a hedge against collapsing markets and bank bail outs. this inflation is not specifically demand pull (ie more demand for food though that has some impact). housing costs were down close to 1% in the last year within the cpi to give some balance.
trying to preserve the value of your nest egg in times like this can be very hard. for a few years i have been in corporate bonds (companies with strong cash flows and cash in the bank) yielding 7-7.5%. there are some shares paying good dividends still but all of those carry some element of risk. cash is probably king really though you cannot beat self-sufficiency. the 1/4 section is still the greatest gift the citizenry ever received: land, food, water, recreation.
the last 20 years have seen a giant bull market but its unlikely those gains will be repeated for some time. it is also very likely those gains may be reversed. so stay liquid and stay out of debt.
February 26th, 2011 at 2:55 am
katherine: thanks for the words of support. i have had some good support and feedback on this from several different directions which is encouraging. i’ll post up the formal proposal that will be sent to the leaders of all the political parties. stay tuned.
February 26th, 2011 at 3:39 am
With growing demands in China and India especially with a growing population and a rise to imports, I do believe this does have some bearing on the current increase in food prices. I suspect with the rise in the cost of fuel will lead to further rises leading to further inflationary pressures. I don’t see how a cut in the OCR is going to be of any help especially if banks reduce the amount of interest they are willing to pay. My view is that if banks drop interest rates to drive growth, this will simply lead NZ back to the days of credit. I believe that New Zealand needs further corrections to the housing market before any further cuts are made. This will also force people to save more. That’s my opinion anyway.
Now like you I believe that cash is king however depending on how the currencies war pans out, I am less inclined on holding cash. Have about 100K+ parked away in term deposits however they don’t see much growth even at an interest rate of 5%.
February 26th, 2011 at 3:54 am
OM: sure that’s a big issue but it’s very much priced into markets. Fuel is a big issue as well but these are matters outside our control. What we can do is move to more renewable and domestically available energy. In terms, of dropping the OCR this post is not really about that. But just think about this: if the OCR was raised, for example, then the price of everything goes up simply adding to the pain…and embedding rising prices into the system..leading eventually to a bust. That has been mainstream policy for many years and it hasn’t worked.
Also part of mainstream policy thought has been the idea that if you drop rates everyone rushes out to buy stuff. Check out Japan for a refutation of this idea. In an ideal world, yes that might work but the global financial system is being held together by tape at the moment. The old responses do not work. Everyone is in lockdown and worried about the future. The boom is well and truly over and we have years of sideways or downwards activity to deal with….so really its about hunkering down and holding tight.